{"id":13363,"date":"2019-02-22T12:29:55","date_gmt":"2019-02-22T16:29:55","guid":{"rendered":"https:\/\/www.inesad.edu.bo\/2019\/02\/22\/bolivias-problem-is-macroeconomics-not-socialism\/"},"modified":"2019-02-22T12:29:55","modified_gmt":"2019-02-22T16:29:55","slug":"bolivias-problem-is-macroeconomics-not-socialism","status":"publish","type":"post","link":"https:\/\/www.inesad.edu.bo\/en\/2019\/02\/22\/bolivias-problem-is-macroeconomics-not-socialism\/","title":{"rendered":"BOLIVIA\u00b4S PROBLEM IS MACROECONOMICS, NOT SOCIALISM"},"content":{"rendered":"

By:<\/strong> Noah Smith<\/em><\/p>\n

Economics:<\/strong><\/em><\/p>\n

Countries that rely on commodities, external financing <\/em>and currency pegs are always vulnerable to turns in markets.<\/em><\/p>\n

Bolivia might be the world\u2019s most successful country that calls itself \u201csocialist\u201d (the Nordic countries generally\u00a0eschew<\/a>\u00a0the label). When Evo Morales was elected president in 2006, he explicitly\u00a0repudiated<\/a>\u00a0capitalism and\u00a0aligned<\/a>\u00a0Bolivia with Hugo Chavez\u2019s Venezuela and Fidel Castro\u2019s Cuba. Since then, Morales has\u00a0redistributed<\/a>\u00a0income through various government programs, raised minimum wages substantially, and\u00a0nationalized<\/a>\u00a0industries such as telecommunications, oil and electricity.<\/p>\n

Much to the chagrin of socialism\u2019s detractors, the strategy worked. Even as Venezuela fell into economic ruin, Bolivia entered an unprecedented period of sustained rapid growth:<\/p>\n

The Shape of a Socialist Boom<\/h3>\n

Bolivia real gross domestic product per capita*<\/p>\n

\"\"
Source: Federal Reserve Bank of St. Louis
* Constant dollars, 2010<\/figcaption><\/figure>\n

By 2017, Bolivia was 42 percent richer than when Morales took office. But for the average Bolivian, the results were even better — the country\u2019s Gini coefficient, a measure of income inequality,\u00a0fell by<\/a>\u00a0more than\u00a019 percent<\/a>since Morales took office. Poverty\u00a0has declined<\/a>\u00a0by 25 percent since he was elected. Although Morales has showed some disturbingly authoritarian\u00a0tendencies<\/a>, including doing away with presidential term limits, economically he seems to have turned his country around.<\/p>\n

But Bolivia\u2019s success may not prove durable. The country is at risk of falling victim to a force that bedevils socialist and capitalist economies alike — macroeconomics.<\/p>\n

This is the argument in a new\u00a0working paper<\/a>\u00a0by economists Timothy Kehoe, Carlos Gustavo Machicado, and Jos\u00e9 Peres-Caj\u00edas. They note two disturbing facts about Bolivia. First, since 2008, its exchange rate has been effectively\u00a0pegged<\/a>\u00a0against the U.S. dollar:<\/p>\n

Pegged in Place<\/h3>\n

U.S. dollar-boliviano exchange rate<\/p>\n

\"\"
Source: Bloomberg<\/figcaption><\/figure>\n

This could set the stage for a currency crisis if Bolivia isn\u2019t careful.<\/p>\n

In order to maintain a dollar peg, a government has to buy and sell dollar-denominated assets. When there is pressure for the dollar to strengthen — and thus for the domestic currency to weaken — the government has to sell dollar-denominated assets and then swap those dollars for the domestic currency (in this case, the boliviano). If Bolivia ever runs out of dollar assets, it won\u2019t be able to stop the boliviano from depreciating, resulting in a very rapid crash in the currency\u2019s value.<\/p>\n

Bolivia is not running out of foreign exchange reserves yet. It accumulated reserves from the start of Morales\u2019s tenure through late 2014, when the trend reversed:<\/p>\n

A Shrinking Cushion<\/h3>\n

Bolivia reserve foreign exchange holdings<\/p>\n

\"\"
Source: International monetary Fund via Bloomberg<\/figcaption><\/figure>\n

Reserves have now fallen to about half of their peak levels. That\u2019s not in the danger zone yet, but if the trend continues, things will get worrisome.<\/p>\n

A currency plunge is an especially frightening prospect because of Bolivia\u2019s increasing external debt. Though Bolivia hasn\u2019t yet borrowed nearly as much from other countries as it did in the 1980s (relative to the size of its economy), the amount that Bolivia\u2019s government owes in foreign currencies has approximately\u00a0quintupled<\/a>\u00a0since 2007. The country\u2019s total external debt has gone up by about 30 percent:<\/p>\n

Running Up the Tab<\/h3>\n

Bolivia gross external debt<\/p>\n

<\/div>\n
\"\"
Source: World Bank via Bloomberg<\/figcaption><\/figure>\n

If Bolivia is ever forced to abandon the dollar peg and the boliviano drops in value, this foreign-currency debt could become very costly to service. Bolivia could then be forced to choose between two disastrous alternatives — a sovereign default, or Venezuela-style hyperinflation. A default would probably be less damaging in the long term, but in the short term it would bring an end to Morales\u2019s economic boom.<\/p>\n

What could put so much downward pressure on the boliviano that the government runs out of foreign-exchange reserves? A commodity price drop. Bolivia, though much more diversified than oil-dependent Venezuela, still relies on commodities for the majority of\u00a0its exports<\/a>, with natural gas and zinc ore taking the largest shares. Lower global\u00a0commodity prices<\/a>\u00a0are probably the reason that Bolivia has been running down its reserves since 2014 If those prices don\u2019t recover and Bolivia isn\u2019t foresighted enough to slow its external borrowing and adjust its currency downward, it could suffer the classic fate of resource-dependent emerging markets — a\u00a0sudden stop<\/a>\u00a0of private investment, followed by abandonment of its exchange rate peg, a government default and a deep recession.<\/p>\n

In other words, there are economic forces that no system — either socialist or capitalist — can overcome. Bolivia\u2019s fundamental limitation is that it\u2019s economy depends on exploiting natural resources instead of industry. Resource-dependent economies tend to spread the wealth around, which is generally a good thing. But when the populace gets used to a certain standard of living, governments often respond by trying to overvalue the currency so as to be able to afford lots of imported goods. That can set countries up for a fall when the commodity cycle turns, as it always does. This is one aspect of the political-economic difficulties that tend to afflict resource-exporting countries — the so-called\u00a0resource curse<\/a>.<\/p>\n

So unless commodity prices turn around, the world\u2019s most successful socialist country could be in trouble. Opponents of socialism will no doubt cry victory in the event of a Bolivian collapse. But the real culprit will be the iron laws of macroeconomics.<\/p>\n

\n
\n

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.<\/em><\/p>\n<\/div>\n<\/div>\n

To contact the author of this story:<\/em>
\nNoah Smith\u00a0at\u00a0nsmith150@bloomberg.net<\/a><\/em><\/p>\n

To contact the editor responsible for this story:<\/em>
\nJames Greiff\u00a0at\u00a0<\/em>jgreiff@bloomberg.ne<\/em>t<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By: Noah Smith Economics: Countries that rely on commodities, external financing and currency pegs are always vulnerable to turns in markets. Bolivia might be the world\u2019s most successful country that calls itself \u201csocialist\u201d (the Nordic countries generally\u00a0eschew\u00a0the label). When Evo Morales was elected president in 2006, he explicitly\u00a0repudiated\u00a0capitalism and\u00a0aligned\u00a0Bolivia with Hugo Chavez\u2019s Venezuela and Fidel …<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"advanced_seo_description":"","jetpack_seo_html_title":"","jetpack_seo_noindex":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[531,362],"tags":[],"class_list":["post-13363","post","type-post","status-publish","format-standard","","category-media","category-medios"],"acf":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9wqBX-3tx","_links":{"self":[{"href":"https:\/\/www.inesad.edu.bo\/en\/wp-json\/wp\/v2\/posts\/13363","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.inesad.edu.bo\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.inesad.edu.bo\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.inesad.edu.bo\/en\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.inesad.edu.bo\/en\/wp-json\/wp\/v2\/comments?post=13363"}],"version-history":[{"count":0,"href":"https:\/\/www.inesad.edu.bo\/en\/wp-json\/wp\/v2\/posts\/13363\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.inesad.edu.bo\/en\/wp-json\/wp\/v2\/media?parent=13363"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.inesad.edu.bo\/en\/wp-json\/wp\/v2\/categories?post=13363"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.inesad.edu.bo\/en\/wp-json\/wp\/v2\/tags?post=13363"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}